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In another sign that the US residential real estate market is recovering the national negative equity rate ended 2013 below 20% for the first time in years, according to the latest report from Zillow.

It fell to 19.4% of all home owners with a mortgage which means that nationally more than 9.8 million home owners remain underwater, owing more on their mortgage than their home is worth.

However, the good news is that negative equity has fallen for seven consecutive quarters as home values have risen, freeing almost 3.9 million home owners nationwide in 2013.

The national negative equity rate fell from 27.5% of all home owners with a mortgage as of the end of the fourth quarter of 2012, and 21% in the third quarter.

But while negative equity is slowly but surely receding, a number of factors will help ensure it remains a factor in the market for years to come and the report points out that the ‘effective’ negative equity rate, which includes those home owners with a mortgage with 20% or less equity in their homes, remains stubbornly high.

Some 37.6% of home owners with a mortgage are effectively underwater, unable to sell their homes for enough profit to comfortably meet expenses related to listing a home and purchasing a new one.

‘We've reached an important milestone as negative equity has fallen below 20% nationwide, which has helped free up marginally more inventory and contribute to further stabilization of the market,’ said Zillow chief economist Stan Humphries.

‘But a number of headwinds will prevent negative equity from falling at the kind of sustained, rapid pace we need before the market can completely return to normal, and it remains roughly four times what it is in a healthier market. High negative equity is just another sign of how distorted the market continues to be, and how far we still have to go on the road back to normal,’ he added.

Home values ended 2013 up 6.6% and this, according to Zillow, is the single largest contributor to the falling negative equity rate. But the pace of home value appreciation is slowing, with home values expected to rise just 3.4% in the next 12 months, according to the most recent Zillow Home Value Forecast.

As home value appreciation slows, the pace of negative equity improvement will slow too and nationwide, the negative equity rate is expected to fall to 17.2% by the end of 2014, according to the Zillow Negative Equity Forecast.

But in some local markets, negative equity could rise as homes lose value. Negative equity is expected to rise in 26 metro markets nationwide, including in St. Louis, the only market among the 35 largest that is expected to see its negative equity rate go up in the next year. Negative equity is expected to remain flat in another 227 metros.

Finally, at the end of the fourth quarter, the number of homes foreclosed nationwide fell to just over five homes per 10,000, from roughly 6.1 homes per 10,000 at the end of 2012.

The report points out that as foreclosure activity continues to fall, the pace of negative equity improvement will also slow, as home owners' debt is wiped from lenders' books following foreclosure.

This article was republished with permission from Property Wire.